Hospital / Physician Integration Models Curt J. Chase, Husch Blackwell P. Anthony Long, Paragon Health
AFTERNOON AGENDA � Hospital / Physician Integration Models in Response to Health Reform � Structural and Regulatory Issues for Integration Transactions � Valuation and Compensation Perspectives of these Models � Compliance Implications for Integrated Delivery
Will Medicare ACOs be successful? Initially very few. Why?
CHALLENGES � Industry reaction to the proposed regulations is lukewarm at best � Few healthcare organizations are pioneers – they tend to adopt what works for others � Process is complex, uncertain, and costly � CMS does not expect widespread participation � 75-150: CMS estimate of the number of Medicare ACOs formed to participate in the Shared Savings Program during first 3 years. � $1.75 Million: CMS estimate of the start-up and first year operating expenditures for each ACO. � Many organizations are not prepared to be a Medicare ACO � Not enough integration between providers (financial / clinical / trust) � Don’t have data to accurately measure quality or cost � Don’t have mechanism to share risk
ARE THERE ALTERNATIVES? First, understand what the drivers are for integration
INTEGRATION DRIVERS � Contain or reduce costs � Improve quality � Better coordination of care among providers � Gaining a competitive edge in the market � Physicians are combining to form super groups � Hospitals trying to maintain market share � Commercial plans (United) are getting into the game
Drivers Impacting Today…and Tomorrow
ISSUES TO ADDRESS / QUESTIONS � We have to have an ACO. � We have to buy and employ our physicians because there won’t be any left if we don’t. � Can we have our own ACO? � How can we compete with the Hospital down the street or across town that is more integrated? � Should we jump in now or wait and see if this all goes away? � Will ACOs really take hold or is this all a fad like the PHOs and capitation concepts of the 90’s?
WHAT ALTERNATIVES ARE AVAILABLE?
ALTERNATIVE MODELS TO A MEDICARE ACO � Test the waters � Choose areas where you can work with partners to reduce costs (service line co- management) � Identify a few key areas to measure quality and reward successful participants � Next Steps � Create or refine the infrastructure and operations to financially and clinically integrate with other providers to manage costs, share some risk, and measure outcomes � Work with a major commercial plan on a specific initiative to meet these goals for a specific group of patients or service line (ortho, cardiology, transplant)
MODELS TO CONSIDER (whether you are a Medicare ACO or choose another form of integration) 3 LEVELS ON THE SPECTRUM OF INTEGRATION Contractual Model JV Model (PHO) “Employment” Model � Hospital, physicians and � Clinically or � Various employment other providers contract financially integrated models ranging from: with each other to share JV to share � full employment of payments, monitor payments / risk physicians by hospital quality, reduce costs, (most integrated); to � Shared governance / manage service-line / � “Group Practice control patients, etc. Subsidiary” models (where physicians maintain significant level of independence)
BEFORE CHOOSING A MODEL, CONSIDER: � Will the ACO be a Medicare ACO? � Will it be focused on commercial payors? � Will it be limited to certain service lines, DRGs, etc.? � What providers are involved (hospital(s), physicians, other providers)? � Will payors be involved? � How will services be compensated (global or bundled payments, shared risk, DRG, capitation)? � How will compensation be split (who takes the risks)? � Will one party control and contract with others or will it be joint control with multiple parties? How will governance work?
MODELS
CONTRACTUAL MODEL Physicians Post-Acute Care Payors
CONTRACTUAL MODEL � Pros � Don’t have to go through integration headaches � Quicker to put together � Less capital requirements � Produces a walk-before-we run model for multiple groups/hospital partners � Established a ‘first step’ towards alignment � Autonomy of parties � Cons � Incentives not as aligned � Sometimes integration headaches replaced with migraines � More legal hurdles since contractual arrangements less protected (gainsharing restrictions, antitrust, Stark, etc.) � More opportunity for misunderstandings – comp/incentive/definitions/goals � No incentives to share risk
“EMPLOYMENT” MODELS Direct Employment Group Practice Subsidiary Physician Integration Model Ownership Ownership Lease Physician Subsidiary Subsidiary Practice Employment Agreements Employment Employment Agreements Agreements Physicians Physicians Physicians
“EMPLOYMENT” MODEL � Pros � Much more integrated � Can more easily share savings (gainsharing) / information � Less regulatory issues (Kickback, Stark, Antitrust) � Hospitals can direct referrals by employed physicians � Can build alignment across specialties – The “In” Crowd � More flexibility in distributing global payments, etc. � Cons � More effort to put together � Hospitals “lose” money unless appropriate incentives to MDs � MDs wont agree to employment unless “kept whole”, putting economic risk on Hospital � Majority of models still do not align economic risks � MDs may have less autonomy / governance
PHO (OR OTHER JV MODEL) Physicians Others? Payors PHO
PHO (OR OTHER JV MODEL) � Who thought PHOs and JVs were dead? � Pros � Forces Hospital and MDs to think through the governance issues up front � Gives MDs a real voice � Shares risk among providers - consistent incentives � Cons � Lots of skepticism with PHOs based on past history � Still have many legal issues to address (particularly antitrust) � Governance and control can be very difficult to agree upon � Splitting fees can be a difficult issue - administratively difficult to manage
Structural and Regulatory Issues for Integration Transactions Robin V. Foster, Husch Blackwell Winn H. Halverhout, Husch Blackwell
With a focus on systems that incentivize quality performance and utilize sharing principles, remember nothing has really changed for ACO- style structures outside of the Medicare shared savings program � Proposed regulations deal with Medicare ACO's � Policy changes (e.g., new FTC guidance) not applicable to Purely Private Pay-based "ACOs" � Old rules still apply
As hospitals, physician practices and other evaluate their options, it is important to consider: � Governance and control issues � Tax issues � Antitrust Issues � Stark and Anti-kickback Considerations
Governance/Control Considerations � Key questions in choosing a structure: � What are the principal objectives and concerns of each participant? � Mission goals � Economic goals � Control over future decisions � Areas requiring "super majority" approval � Admission of new participants � Fundamental changes in business plan/budgets � Change of Control events � Dispute resolution � Fiduciary obligations and concerns � Conditions for termination of relationship/dissolution of enterprise � How do these considerations affect each model?
Governance/Control Considerations – Employment Models � Direct Employment Model: � Terms of employment agreement control--No shared "governance“ � Written agreements highly recommended � Ensure clear understanding of the rights and duties of each party � Define conditions for termination of employment
Governance/Control Considerations – Employment Models � Group Practice and Physician Integration Models: � Governance through Practice Subsidiary BOD � Key issues: � Address Concerns of Physician Employees of Group Practice � Control by Physicians over Operation of Group Practice � Compensation/terms of employment � Selection of Management � Address Concerns of Member Hospital through reserved powers: � Further Member/Hospital's charitable purposes � Protect 501(c)(3) status/Bond compliance/Other tax issues � Notice/approval rights with regard to new physician employees
Governance/Control Considerations – Contractual Model � Not Integrated, so no shared governance � Controls based 100% on contractual covenants and obligations of the parties
Governance/Control Considerations – PHO/JV Models � Governance may be a major factor: � Considerations include comfort level with "partners" � Expectations of the parties--clearly define � Choice of Entity: � Corporation--Governed by Board of Directors � More formalities � Fiduciary duty issues � Limited Liability Company--Governed either by members or managers � Significant freedom of contract to structure governance � Significant flexibility to structure other arrangements � Simple partnership--Governed by partners in accordance with partnership agreement � Not likely to be used due to personal liability exposure and availability of other forms
Tax Considerations � Hospitals – Generally � Tax exemption � Intermediate sanctions � Tax-exempt bonds � UBIT
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